“We are aware of the link between the Elad [settler] group and the Israel Antiquities Authority. We are concerned that this link has led to Israel Antiquities Authority’s support of radical settler activities in and around the Old City under the guise of tourism and protection of Jewish history,” Conservative Foreign Office minister Baroness Anelay said.

“Such actions not only aggravate mounting pressures in East Jerusalem but serve to increase tension around the Temple Mount/Haram al-Sharif and further complicate future attempts to negotiate a political resolution on the city.”

Elad has previously paid the Israeli Antiquities Authority to dig deep trenches near the foundations Palestinian homes and mosques in East Jerusalem.

Palestinian residents of the area blamed the excavations for the collapse of a number of their buildings, according to Israeli newspaper Haaretz.

Israeli settlements are illegal under international law and the United Nations has repeatedly told its government to vacate Palestinian territory, which is illegally occupied.

Last week Elad settlers are reported to have entered an East Jerusalem apartment building lived in by Palestinians and removed the belongings of the people who lived there.

The resident of the building, a woman, at been summoned to a local police station for questioning at the time.

In a statement the group said the properly belonged to them and that it was had “exercised its rights”.

Israeli settlements are illegal under international law and the United Nations has repeatedly told the country’s government to vacate occupied Palestinian territory.

Human rights groups have also criticised the settlements, which Amnesty International says are responsible for “a myriad of human rights violations”.

The Israeli Antiquities Authority is an official agency of the Israeli government.

Since 1978 it has been charged with identifying, preserving and excavating historical artefacts in the region.

Israel’s Prime Minister Benjamin Netanyahu said this month during the country’s general election campaign that there would be no Palestinian state on his watch.

His statement drew criticism from the United States, usually an ally of Israel, which said it would “reassess” its stance on the conflict in the region.

Civil servants in the Foreign Office have long believed that Mr Netanyahu is an “armour-placed bullshitter”, according to revelations published in a new book by the last Labour government’s communications director Alastair Campbell.

The United States government said in January that a plan to expand illegal settlements by 450 homes would “inflame tensions”.